A look at earnings season

As earnings season winds down, we look at the performance of US corporates over the past three months, and whether the outlook for earnings remains supportive of further gains in equity markets. 

As the bulk of earnings season in the US recedes from view, it is important to see how well or badly the US corporate universe has performed. During the hubbub of the period, when company reports are in full flow, it is often difficult to gauge the overall picture.

Out of the 498 companies in the S&P 500, 453 have reported as of 10 August. Data from Bloomberg shows that only the oil and gas sector has disappointed overall on earnings, with an average miss of 6.4%. Meanwhile, only the telecoms sector missed overall on sales, by just 0.2%.

Overall, growth in sales has been up 10.09% over the previous quarter, while earnings are up by 25.5%. Earnings growth has accelerated for the past five quarters, as has sales growth, painting a very positive picture of the outlook for the US economy and US corporates.

In further encouraging developments, two key metrics have held at their post crisis highs. In the first graph, we can see trailing 12-month earnings per share (EPS), in dollars. This remains at the post-crisis high seen in the first quarter, while the second, trailing 12-month operating margins, are at near the peaks seen in 2014 and 2018:

These are very healthy numbers, but we should expect a decline in the quarters to come. The dollar’s appreciation began to feature in a number of earnings calls, but should become a more persistent feature as the year goes on. In addition, should trade wars worsen in intensity then we could expect further hits to sales. The chart below shows the relationship between S&P 500 sales and the US dollar (blue line, inverted). A higher dollar will likely hit sales, as about half the sales of the S&P 500 are derived from outside the US:

A final point to note is that US equities are cheaper now than at the end of 2017, when the trailing price to earnings (PE) for the S&P 500 hit its highest level since 2009. The subsequent pullback in equities took out much of the froth, and even at 20 times earnings the index is still cheaper than in the 1999-2001 crisis:

Earnings season has reinforced the idea that the US economy and its companies will continue to grow. As this long-term (i.e. post-2013) secular bull market marches on, it is likely that equity prices will continue to rise, as earnings growth remains solid.

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